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New BSP Governor Doing Proactive Role

The Bangko Sentral ng Pilipinas (BSP) under new leadership is living up to its role of supporting economic growth. It reduced the benchmark interest rates on May 9, the first time under the leadership of Governor Benjamin Diokno. A week later, it announced a 200-basis-point reduction in the reserve requirement ratio (RRR) for universal and commercial banks, a move that would effectively release over P230 billion worth of additional liquidity into the market.


I believe Diokno, a noted economist and former budget secretary, did a good job in assessing the macroeconomic situation before leading the Monetary Board to cut the overnight borrowing rate by 25 basis points to 4.5 percent and bring down the RRR.


So far, he is doing well at the BSP after his good performance at the Department of Budget and Management. Aside from the interest rate cut, Diokno is mindful of other tools, such as the RRR adjustment, to ease the credit situation and reduce inflationary pressures.


The BSP considered two major factors in deciding to reduce the interest rates on reverse repurchase (overnight borrowing) facility, as well as the overnight lending and deposit facilities. One is the slower-than-expected economic growth in the first quarter, and the other is the manageable inflation rate this year.


As the economy grew at a four-year low of 5.6 percent in the first quarter, a reduced interest rate will encourage greater spending and support expansion. This is timely as inflation rate eased to a 16-month low of 3 percent in April, and within the government’s 2019 target range of 2 percent to 4 percent.


The 3-percent inflation rate in April also fell within the BSP forecast of 2.7 percent to 3.5 percent for the month. This brought down the average inflation in the first four months to 3.6 percent.


Director General Ernesto Pernia of the National Economic and Development Authority (Neda) said the April inflation reading “validates our efforts toward stabilizing inflation so that the country’s buoyant economic growth, along with key reforms, remains unimpeded.”


Food inflation eased because of the stable rice supply, which is expected to continue as the Rice Liberalization Act takes effect. The law, which lifts the quantitative import restriction on rice, is expected to keep rice prices low and more affordable for low-income households, according to Neda.


The government, however, is monitoring upside risks to inflation, such as the El Niño dry spell, a possible increase in utility rates and volatility in international oil prices.


The Monetary Board said its decision to cut the policy interest rates at this time was based on an assessment that the inflation outlook remains manageable, owing to the decline in food prices amid the improved supply.


The latest baseline forecasts indicate that inflation would likely settle within the target range of 2 percent to 4 percent for both 2019 and 2020. Given the benign inflation outlook, the BSP decided to make loans more affordable for businesses and households.


By releasing additional liquidity into the market with the RRR adjustment, the BSP is enabling more companies and households to have more access to loans necessary for expansion and investment.


This only shows that Diokno is a dynamic and proactive BSP governor. He is a decisive and strong leader who knows the right strategy. At the same time, he is patiently working within the Monetary Board—a collegial body.


We can only sustain the strong economic growth and stable inflation rate if the BSP will remain prudent and proactive in its monetary policies. While it should continue to focus on price stability, it also has a crucial role to play to stimulate economic expansion. The powerful BSP controls the supply and cost of money in the country.


The interest rate reduction is expected to translate into more economic activities in the second half of 2019 and will hopefully help the economy grow more than 6 percent again. This will be supported by strong government spending with the release of the 2019 national government budget.


Remember that the budget impasse in Congress forced the government to operate on a reenacted 2018 budget, which, in turn, resulted in underspending of about P1 billion a day or P90 billion in disbursements in the first quarter. The Neda estimated that this shaved off about 1 percentage point in the first-quarter gross domestic 
product growth.


In deciding to reduce interest rates, the Monetary Board also considered the impact of the budget delay on near-term economic activity but took the view that the prospects for domestic demand remain firm, supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program.


It also observed that the global economic growth momentum slowed down in 2019 and that “indications of slower growth in domestic liquidity and credit require careful monitoring.”


Given these developments, I am confident that the BSP under Diokno would continue to monitor developments affecting the inflation outlook and support economic growth if needed.